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A Case Study of the Five Tests of a Sound Strategy

September 26, 2008

A short time ago, there was no such thing as overnight shipping. Then Federal Express, DHL and Airborne Express came upon the scene. At first blush, these three companies appeared to be competitors but upon closer examination, they each passed the five tests of a sound strategy.

DHL staked out in the international shipping arena so if you didn’t need to send something overseas, there was no need to use them. Their value proposition was simple – “DHL ships overseas and the others don’t.” Because of this, they required a different value chain – one that would allow them to take packages, manage them through customs, get them on a plane to some fairway land and then have some method of getting the package from the airport to the intended recipients. Their activities fit together and everyone in the organization knew exactly what the business model was and how to deliver the business’ value. Finally, DHL, for the most part, chose NOT to compete in the domestic market space.

You may recall Federal Express’ initial advertising campaign. It was simply stated as “when it absolutely, positively has to be there overnight.” Their second marketing campaign was built around the slogan “our most important package is yours.”

These two messages are core to understanding the FedEx strategy. The business model was that you could count on your important package being delivered anywhere in the United States by 9:30 am in that particular time zone provide that the package was in a FedEx drop-off box by 7 pm the night before. The second slogan creatively expressed that Federal Express treats all of our packages the same. There is no differentiation based on who sent it or why or even what is inside. Indeed, the most important package that FedEx was delivering was everybody’s.

The FedEx model was pioneering in the overnight shipping industry because their value chain created a standardized way of assuring delivery overnight of any package. This required a value chain that guaranteed and measured the time by which a package was received as well as when it arrived. The company chose not to promise faster delivery of any package – the package would always be delivered by 9:30 the next morning even if the customer was willing to pay more for special treatment. And everyone in the company knew the model.

I remember when the FedEx deliver person would come to pick up a package at our offices. If the package wasn’t ready when the client said it would be, the FedEx employee would become agitated and sometimes even leave the office without the package if the wait was too long. Boy, were they in a hurry! Our staff never even knew the FedEx employee’s name because there was never any time for conversation. Chasing the clock is very intense work.

And then there was Airborne Express…

There aren’t many who remember their advertising slogan because Airborne chose not to advertise. Airborne’s model was built around custom delivery services. They made business deals with companies that required frequent and ongoing shipments that had to arrive before 9:30 am. Some of their customers were companies that supplied parts and needed to have these parts in a technician’s hand before 9:30 am. Airborne would even build warehouses and acquire roadway services if the customer was large enough so that it could adhere to the promise of customized delivery.

Did the shipping customer pay more? Sure. But for those companies who needed to get staff on the road sooner than 9:30 am, the premium was well worth it. The interesting thing was that if there was a package that was not from an elite customer, there was no guarantee that it would arrive on a certain day, let alone by a certain time. Their most important package was the one sent by the special customers who shipped large volumes of packages requiring special care or timing.

Airborne too passed the test of a sound strategy. Unique value proposition? You betcha. Tailored value chain? Check. Choosing what not to do? Absolutely. Activities that reinforce one another? Certainly. Strategic continuity? Without a doubt.

All three companies effectively executed their strategies and also taught us that you can serve the same function and be successful if you implement a sound strategy.

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Categories: Strategic Plans, Strategy, Visioning
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The Five Tests of a Sound Strategy

September 24, 2008

Assuming that we know “what we want to be,” that is, we now have a vision in place, we can begin to immerse ourselves in deciding the best path toward reaching our destination.

Yes, we are finally ready to formalize our business strategy.

Strategy is defined based upon (1) the industry and your position within the industry as well as (2) your position relative to your competitors’ position.

Most people think of strategy as optimizing what they already do and being the best at it, leading them to conclude that there is one, best way to compete. Strategy is really about choosing to differentiate one’s product / services from one’s competitors.

Failing to differentiate one’s products / services from those of one’s competitors – meaning the consumer can’t decide which product is better — creates destructive competition in which the only distinction is price. Price competition is never sustainable and is unwinnable.

Competing effectively means that a company is

  • Exceeding the Industry Average Return
  • Creating a return greater than those of most or all of your competitors

To win, you either have to have a higher price (justified by a differentiation of product / service) or a lower cost (justified by a more efficient value chain). You need to operate from the industry cost vs. your cost and the industry price vs. your price. Regardless, you have to be profitable. After all, you can’t have an army without feeding it…and you can’t have a business without being able to sustain it.

Five Tests of a Sound Strategy

There are five tests of a sound strategy

1.      A unique value proposition compared to competitors

2.      A different, tailored value chain

3.      Clear tradeoffs, and choosing what NOT to do

4.      Activities that fit together and reinforce each other

5.      Strategic continuity (having the strategy permeate throughout the organization)

Defining the Value Proposition

Defining the value proposition means identifying the end users and the channels used to sell to them; understanding the end user’s needs and which products, features, and services will address them; and creating a profitable price at which they will buy. We have already discussed how we can learn more about what our customers are really buying.

According to UCLA Anderson’s School of Management Professor Richard Rummelt, there are two ways to get to a successful value proposition. One, you can invent your way to success. Unfortunately, you can’t count on that. The second path is to exploit some change in your environment – in technology, consumer tastes, laws, resource prices, or competitive behavior – and ride that change with quickness and skill. The key is to take a position while there is uncertainty and ambiguity. Clarity occurs only after a company takes a position. However, by choosing to let another take a position, one loses the opportunity to profit from the knowledge.

The second path is how most successful companies develop their plan. Changes do not come along in nice annual packages, so the need for strategy is episodic, not necessarily annual.

Sustaining Competitive Position – The Role of Tradeoffs

  • Choosing a unique position is necessary but not sufficient to create a sustainable advantage because of the threat of imitation
  • Traditional thinking focuses on competitors’ difficulty or ability to imitate
  • Equally, if not more important, is whether competitors want to imitate
  • Tradeoffs are incompatibilities between strategic positions that create the need for choice
  • Strategic tradeoffs lie at the heart of sustainability
  • An essential part of strategy is choosing what not to do

The takeaway is that as business leaders, we want to encourage choice. In fact, we want to our offering to appeal to our target consumers. We want the service / product to contain exactly what they would like and not have more features than are required, even if they are additional to what the consumer wants. Additional and unnecessary features only drive up our costs and reduce profitability.

In the next post, we’ll talk about companies who employed this approach to great success.

Categories: Leadership, Strategic Plans, Strategy
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The Financial Crisis, Early Warning Systems and the Leader’s Role

September 18, 2008

Crises just don’t happen.

As with any difficult time, the challenge is always how to learn from the experience to assure that it doesn’t happen again. Clearly, there will be some very provocative analysis. Some will attribute the root cause to greed. Others will state that the lack of regulatory oversight contributed to this problem. However, I feel that the very root cause may be elsewhere.

Every business leader must install four components by which they can operate their company.

The first is, of course, a strategy and operation plan. Strategy, as we already know, provides the corporate direction and the operational plan provides that tactics that we are to follow that will get is to the strategic destination. Together, they tell our organization what we must do.

If the strategy and operational plan detail the “what,” then it is the management philosophy that details the “how.” Every business begins and ends with people and their behaviors. A company must recognize the mutual opportunities and responsibilities with its customers, employees, stockholders, suppliers, communities and the public.

This recognition leads us to believe that it is desirable to have a common philosophy. The company’s philosophy should be the basis for actions by managers at all levels of the organization.

An effective management philosophy details

  • What the company is and what it will become
  • How the business will be managed
  • The basic responsibility for each employee
  • The human values that we will live by
  • The company image

The third pillar that must be in place is the compensation program. It should motivate people to properly deliver on corporate tactics consistent with the management philosophy. It serves as a means by which employees will wish to stay within the organization.

Finally, a set of steering mechanisms must be in place. Think of it as more than key performance indicators. It is the dashboard that illustrates how the business is “flying” in all areas and allows for early recognition of difficulties so that course corrections may be easily made and made as early as possible.

So , from a management and leadership perspective, what likely went wrong that caused this crisis?

It is likely that the failures that triggered this crisis are a result of deficiencies in all of the above areas.

  • The strategic and tactical plan may have been flawed in that it took on too much inappropriate risk.
  • The management philosophy may have either ignored or encouraged the achievement of short-term profits at the expense of long-term growth and therefore encouraged irresponsible behaviors and actions.
  • The compensation program may have rewarded results that were produced without consideration to proper behaviors.
  • The steering mechanisms may have been ignored at the earliest stages and therefore corrective actions could not be taken soon enough

The management lesson for all of us then is to place and actively reinforce these elements within our business. It is surest way to avoid catastrophe and the friendliest path to growth and success.

Categories: Leadership, Strategy
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Discovering the Benefits that We Provide to Our Customers

September 17, 2008

We believe that as good managers and leaders, you have a good feel for why your customers work with your company. There is a tremendous opportunity when creating a strategic plan to really tighten that perspective.

We naturally have a tendency to ascribe our own personal perspectives as to what a customer really values about a product. Put simply, this is the wrong way to evaluate the benefits of what your company provides.

The customer’s viewpoint is truly all that matters. To discover that perspective, you must do two things.  First, you must talk to your customers. Second, you must listen to them and hear what you don’t already know.

Your customers will tell you what works great about your product or service. They will tell you what your product or service does for them, how it works and what they find valuable about it. Listen to the small things that they are saying. Can you find a pattern? Can you group their answers into something important?

Ask approximately a dozen of your core customers and a few organizations that you would like to be customers, in each customer segment, a series of questions. Asking these questions results in finding out with certainty what is meaningful to them.

We recommend that you ask these four questions.

1)      What are your reasons for working with our company (what do you value about us) or what are your reasons for using our service or product? The answers to this question will tell you why the customer uses your product or service today.

2)      Where do you think your industry is heading? The answers to this question will provide you with the context regarding the issues that your customer will need to manage in the near term.

3)      How will you operate given the direction of the industry that you’ve just described? The answers to this question will tell you how your client needs to work in the future. It will begin to give you insight as to what you will need to provide in the future that will allow you to keep earning their business

4)      What will you expect from our company (or our product or service) in the future (what will make us indispensable to you)? The answers to this question will provide you with what your client sees that you will need to do to keep earning their business.

Undertaking this interview will produce substantial and wide-ranging benefits. You will:

  • Learn how to better express your value to the marketplace
  • Discover short-term opportunities to sell additional goods or services.
  • Be able to add and contribute to your clients’ strategies
  • Very naturally deepen your relationship with your customer as every customer wants to feel special and simply showing interest
  • Gain thee necessary business intelligence to accurately plot a future

The bottom line of this exercise is that you will find short-term and long-term opportunities and your clients will make you much smarter about your own business.

Categories: Leadership, Strategy, Visioning
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What are your customers really buying?

September 12, 2008

f you take a closer look at the list of areas for discussion when starting to craft a vision statement, you would notice that our list begins with “customers.”

So what are your customers really buying?

It seems like a simple enough question. Yet it is at the core of designing your marketing and strategy. It requires you to have an in-depth, pinpoint knowledge of what your customers think and feel they are purchasing rather than what you think you are selling. It is from the point-of-view of your customers only that the question is of any value.

Everyone says they have the best, most reliable, highest quality, most complete array of features at the lowest possible prices! No one is out there saying that his product is expensive, narrowly featured, of low quality, and only marginally useful! Since everyone makes the same claims, you can be certain that your customers are not reacting to the claims. Your customers must, in fact, be reacting to something else. Your customers are reacting to something personal.

McDonald’s is not selling hamburgers. Domino’s is not selling pizza. McDonald’s sells speed (fast food) but also fun and nutrition. Domino’s sells time. Your value becomes much clearer – once you’ve looked deeply at what your customers are buying. Yet, making that determination was not as easy as it seems in retrospect, or as you’re about to discover when you participate in this process.

You are about to engage in creating the benefit of your product or service expressed as your Unique Selling Proposition. That proposition should not be trivial. In fact, the more emotionally based or financially based these benefits are, the better. If you can get in both, you’ve hit a home run! Which emotions? Hope, fear, love, happiness, fitness, value. This is where you want to head.

Once you begin to think this way, it will alter how you represent what you do.

I had the privilege of hearing a presentation from two of the foremost business coaches, Jay Abraham and Chet Holmes. Jay and Chet had an interesting way of framing and expressing the work that one does so that its value is both clear and intriguing to the listener.

Imagine that you’re sitting on an airplane and the person next to you asks, “what do you do?” You say, “I do this.” (Sell donuts, clean carpets, etc.) While that is true, it is not what the product is to the buyer. The buyer only buys what the product does for him or her. You want to define what you’re doing in terms of teh best outcome in order to get the response, “Gee, how do you do that?”

You could be cleaning carpets when you sell that vacuum cleaner or perhaps what you really do is this, “I show people how to clean their houses in such a way that they have a perfectly healthy, dust free, microbe free environment.”

“Gee, how do you do that?”

Do you write software or do you “build solutions that change and uncomplicate people’s lives, creates possibilities for them to make them more money than they thought they could make, and allows them to spend more time with friends and family.”

“Gee, how do you do that?”

“I provide people with extraordinary vacations that they talk about for the rest of their lives.”

“Gee, how do you do that?”

If you just say, “I run a vacation resort,” or “I clean carpets,” or “I write software,” people will probably say, “That’s fine.” But, as Jay and Chet said, they’ll also probably wish they never asked and return to reading the airline magazine.

Categories: Leadership, Strategy, Visioning
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Living into Your Vision

September 10, 2008

Author and management consultant Peter Block once defined a vision as “a dream created in our waking hours of how we would like our lives to be.” In fact, the word “vison” comes from the Latin word “videre” which means “to see.” It is a picture of the future that we wish to create.

When creating a vision, it is important to articulate it in the present tense. There is a certain dissonance and even a feeling of being uncomfortable when you say you are “something” and you know that you are not. If a vision is expressed in future terms (i.e. “we will do this”), it becomes too easy to say that capability is far into the future and we don’t have to begin thinking, feeling or doing anything that is consistent with our vision.

Feeling uncomfortable when creating a vision is actually the way that one should feel. Noted management guru, Tom Peters, called creating a vision a very “messy artistic process.”

So how does one go about creating a vision – or as I like to refer to it, your personal “impossible dream?”

One begins by asking this question – What would we like to see our company offering, providing or meeting five years from now as it relates to…?

  • Customers
  • Services
  • Organization and employees
  • Professionalism
  • Facilities
  • Productivity
  • Financial structure
  • Standards
  • Partnerships / Synergisms
  • Communication
  • Education
  • Not for Profits should add in “Community Needs” and “Volunteer Organization”

Here are some other questions to ponder:

  • What would you personally like to see your organization become?
  • What kind of customers would it have?
  • What sort of processes might it conduct?
  • What reputation would it have?
  • What contribution would it make?
  • What sort of products or services would it produce?
  • What values would it embody?
  • What mission would it have?
  • What would its physical environment look like?
  • How would people work together?
  • How would people handle good and bad times?
  • If you had this sort of organization what would it bring you? How would it allow your own personal vision to flourish?

Answering these questions will allow you to begin to see clearly what needs to be done.

And isn’t that what having a vision is all about?

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An Appreciation: On the Passing of Dr. Michael Hammer

September 7, 2008

It was with great sadness that I read today of the passing of Dr. Michael Hammer. Dr. Hammer was one of the seminal thinkers and authors in the management consulting industry and influenced me and so many others.

As co-author with James Champy of “Reengineering the Corporation,” he espoused that many of the problems with how companies operate were due to processes that were bloated, inappropriate or simply just ineffectual. As CEO of an IT consulting company, Flash Creative Management, at the time, this resonated deeply with my partner, Yair Alan Griver and me. This led us and our company on a journey that would result in us redefining our business.

Initially, we shifted Flash from being a software development company to one that looked first at the processes that our automation efforts would impact.  Our consulting practice and our team of very talented and committed professionals began to study reengineering in earnest and, needless to say, the impact that we had on our clients grew significantly.

By applying automation and technology after evaluating and redesigning processes, we were able to produce dramatic results. In some cases, this resulted in product design and delivery shrinking from months to weeks and from weeks to days.

Intellectually, Dr. Hammer’s and Mr. Champy’s works prompted us to create and codify best practices for creating visions, redesigning process, implementation planning and improvement strategies, to name but a few. And for me personally, it helped to begin the education process regarding how to develop business strategies as I learned that understanding strategy is the pre-requisite to creating effective processes. As mentioned in an earlier post, the vision of what a company wishes to become is fundamental to all business design.

Over the years, Dr. Hammer needed to respond to criticism that streamlined and automated processes eliminated jobs. He took the position that if a business was not competitive; all jobs within the business were at risk. If you subscribe to the belief that to be successful your business must add a value that your competition does not, it becomes very easy to align with Dr. Hammer’s way of thinking. Efficiency and cost reduction by streamlining processes and aligning actions with strategy are sure ways to make certain that your business is more competitive.

The world has lost one of the most profound thinkers of organizational design. Fortunately, he leaves behind an impressive body of work and many disciples who will build on his teachings.

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